Finance

Suddenlink’s Viacom Outage Looks Familiar

LATEST OPERATOR TO DROP MTV NETWORKS FARE IS BIGGEST ONE YET 10/06/2014 8:00 AM Eastern
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Suddenlink’s decision to stop carrying popular Viacom cable networks could set a precedent for cash-squeezed smaller cable operators.

A growing number of small and midsized cable operators are gambling that Glenn Beck, Oprah Winfrey and former Brady Bunch matriarch Florence Henderson can fill the void left by the loss of Teen Mom, SpongeBob SquarePants and Jon Stewart, as they dig in their heels against a programmer that just a few years ago was a must-have component of their TV lineups — Viacom.

 

Suddenlink Communications was the latest — and largest — operator to reject the parent of MTV, Nickelodeon and Comedy Central, opting to offer customers a suite of less watched and less costly networks like The Blaze, OWN: The Oprah Winfrey Network and RLTV. Viacom went dark to about 1.1 million Suddenlink TV customers in 16 states at midnight on Oct.1, joining 500,000-subscriber Cable One and dozens of other smaller cable operators that have opted not to carry the programmer.

 

With Suddenlink, Viacom has lost access to about 2 million homes as a result, a number that right now makes a small dent in the more than 97 million homes some of its networks reach. And though these distributors have a large number of customers far beyond Viacom’s core demographics — they skew older and more conservative — the move could embolden other pay TV providers to follow suit.

 

TREND-SETTER?

 

“If a prolonged blackout were to ensue, we believe investors would rightfully question Viacom’s ability to get future deals with other small distributors — and maybe even large distributors,” Sanford Bernstein media analyst Todd Juenger said in a note to clients.

 

Even smaller operators with Viacom deals in place, like roughly 6,000-subscriber Buford Media Group, which has a deal through the National Cable Television Cooperative, are cheering Suddenlink on.

 

“As smaller operators we pose little threat to the programmers,” Buford Media CEO Ben Hooks said. “I believe this might give us some leverage down the road. Programming costs are out of line with the value perception of our customers. Hopefully, Suddenlink can stand firm, as Cable One has done.”

 

Viacom has been an easy target for operators wanting to make a statement about rising programming costs. The company’s 24 channels have endured some ratings pressure — in March of 2012, its Nickelodeon kids’ network lost its first monthly ratings crown to the Disney Channel and its other networks have also weathered audience declines.

 

Last year, DirecTV, perhaps sensing that ratings pressure would cow to distributors’ demands for more reasonable fee increases, went without Viacom channels for nine days before reaching a carriage deal. The agreement, which included not only Viacom’s popular cable networks like MTV, Comedy Central and Nickelodeon, but also increased carriage of less popular channels like Nicktoons and its Epix movie channel, which had struggled to find carriage.

 

The deal was largely seen as a win for Viacom, which held its ground and managed to squeeze an initial carriage-fee increase of significantly more than 20%, according to Viacom CEO Philippe Dauman, who said after the deal closed that it was “materially better for Viacom than the deal that was on the table at the time that DirecTV made the unfortunate decision to drop our networks.”

 

“I look to the past as prologue and it is extremely rare — I would argue I’ve never really seen it — where a programmer of scale has ultimately had less leverage than a distributor of scale,” RBC Capital Markets media analyst David Bank said. “I don’t think it signals a real tipping point.”

 

But some operators, especially rural MSOs, believe they can do without Viacom’s edgier programming. Although Suddenlink is sticking to its prepared statements regarding the Viacom dispute, others in the small operator community say the company, and Cable One, which dropped Viacom in April, are tailor-made for such a battle. Both companies have older customers primarily located in smaller, more conservative communities in Midwestern, Southern and Southwestern states. According to those operators, trading conservative pundit Glenn Beck’s The Blaze for MTV is basically a no-brainer.

 

American Cable Association president Matt Polka said small operators, who have to endure even bigger programming-cost increases than their larger counterparts, are nearing the end of their collective ropes. Adding to their dilemma is the practice of allowing programmers to bundle less-watched channels in with more popular ones, which they said drives up prices significantly.

 

Already several small operators — including Seattlebased operator Wave Broadband, with 415,000 residential and business subscribers — have said they envision eventually phasing out video altogether in favor of becoming straight broadband providers.

 

“A number of our members, looking three to five years down the road, don’t see themselves as linear video providers, they see themselves as broadband providers,” Polka said. “

 

SUB-LOSS RISKS

 

But there are risks to cutting back too far. While rural operators may be more insulated, not all of their subscribers are older conservatives. That seems to be playing out with Cable One, which despite its protestations that the Viacom dispute has had no effect on its operations, has more than doubled its subscriber losses in the second quarter to about 34,000, or about 2% of its customer base.

 

In his report, Juenger estimated that Viacom’s suite of channels costs the average operator about $3 per subscriber per month. A pay TV provider that dropped the channels could lose as much as 6% of its customers and still break even, he added.

 

Bank said he didn’t believe the Suddenlink dispute would put a dent in Viacom’s results, but as these battles escalate, they could take a toll on programmers.

 

“The danger is that the perception becomes real [and] involves someone with scale to play chicken a little bit longer,” Bank said. “This is kind of how it starts.”

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